Purchased for $1,219,000 in February 2007, 3423 Divisadero re-hit the market down in the Marina twenty-six (26) days ago asking $1,295,000. It’s two bedrooms, two and one-half baths, and two parking spaces.
And while not a perfect “comp,” a reader can’t help but compare it with the competition next door (which isn’t a perfect apple in and of itself).
Purchased for $750,000 in November of 2002 (with a little work in 2006), 3415 Divisadero #1 returned to the market twelve (12) days ago asking $1,245,000. Two bedrooms and two parking space as well, but only one and one-half baths.
A couple of other tradeoffs between the two on which to weigh in: 3415 is an upper unit while 3423 is a lower, but 3423 includes an exclusive use yard while with 3415 it’s shared.
UPDATE: We missed it, but as a plugged-in reader notes…despite its “official” 26 days on the market and “original” list price of $1,295,000 (a sale at which would be reported as “at asking”), 3423 Divisadero also hit the market last July asking $1,349,000.
∙ Listing: 3423 Divisadero (2/2.5) – $1,295,000 [MLS]
∙ Listing: 3415 Divisadero #1 (2/1.5) – $1,245,000 [MLS]
Both units also sit right on a bus line. These’ll be interesting to watch.
Also, another flat screen mounted above the fireplace at 3423 Divis. Ugh.
I live in an upper unit with a shared back yard, and never use it…
“3423 Divisadero hit the market down in the Marina twenty-six days ago”
Redfin shows it’s been on and off the market since July 11, 2008.
http://www.redfin.com/CA/San-Francisco/3423-Divisadero-St-94123/home/1624433
[UPDATE: Cheers, updated, and asking $1,349,000 at the time.]
I saw both of these over the weekend. 3423 Divis is nice, with a good outdoor space but one of the full baths is downstairs and the only ways to get there are outside or down a super-tight spiral staircase. Not ideal.
3415 is also a very nice place.
There was solid foot traffic at both places but who wants to pay (above) 2007 prices?
What is going rent in this area for places like these?
I noticed that the asking/wishing price of 3423 is almost exactly the purchase price + a 6% real estate commission.
The tax rolls show a $975K 1st TD with WaMu (and no 2nd TD) so it looks like they made a 20% down payment.
My guess is that they don’t gat a lot of solid offers where they are at $1,000/sf+ and the asking price is reduced to loan amount + 6% real estate commission…
It’s harder to make money as a real estate investor when you’re paying that 6%. That 6% is the first thing that needs to go, and the easiest thing to get rid of.
What will be interesting is what will happen to the price of these condos when the Obama deduction limiting tax laws kick in. A loan of 80% is $1.036M and that will take about $300K in income to qualify. Until next year, the mortgage payments to $1M will be deductible.
But after that, there will be a phase out of deductions for households earning $250K or more. That means your tax deduction on this place could last as long as one year, at which point it will no longer be tax deductible, with no grandfathering. So whoever buys these condos based on a rent vs buy that has you paying 1X the rent will rise to 1.5X the rent.
The monthly interest at the low interest rates of today will be 4100. There is already a limited phaseout of deductions which basically results in (as a rule of thumb) the interest being deductible, while the property tax is not (PT IS deductible, but because of the phaseouts, you can identify the total interest + property tax deduction if you assume it isn’t). So, assuming a 50% tax bracket, payment on this place is going to run 2050 after tax interest +1295 for property tax plus maybe $400 for HOA and insurance and add 300 for maintenance, to get about $4000. That’s about what these would rent for. Prices, given the interest rates, have equalized to make the rent vs buy about even.
But if they phase out the deduction, the price will have to fall by about half to keep the rent vs buy even, and that’s assuming the interest rates remain low and rents don’t fall. If interest rates rise and rents continue to fall, prices will have to fall even further.
Not exactly wise to lock in that price right now!
It’s harder to make money as a real estate investor when you’re paying that 6%. That 6% is the first thing that needs to go, and the easiest thing to get rid of.
In my experience, most professional real estate developer/investor/general contractor types would probably disagree with you, do not begrudge paying 5% because they view good realtors as assets.
True… too bad many realtors are chumps who would sell their own mother for a favorable comp and and a few photoshop lies. We’ve all had to deal with them.
And I don’t understand how the few good ones can tolerate working under the NAR and MLS. What’s it feel like to have Lereah and Yun speaking for you? It would drive me batty.
I understood that realtor commissions are generally in the 5% range these days (for most properties). But there is the transfer tax (generally about 0.75% for $1M+ properties) and assorted selling expenses, so 6% seems a reasonable estimate of all in back end transaction costs.
In the hedge fund world, the best managers in the worst markets increase their fees, and people are happy to pay it (e.g. James Simon (Renaissance), or Steve Cohen (SAC Capital), who used to charge 50% (!!!) of the upside without taking any of the downside on the customer funds).
This is clearly a bad market for real estate sellers, so I would expect that some star realtors will have raised their commissions. Is that true?
$800k max. I’d pay $4500 for rent x 12 x 15.
They are still in dream world with those prices. We’re in the worst recession since 1930’s and San Francisco is in a sad state of detail.
I feel bad for the suckers who bite at these prices….
Dave, or anyone else,
Is there any historical precedent for P/R ratios to be as low as 15? From what I understand, the historical avg for SF is somewhere between 24 and 27 (15 and 30 year avg, respectively). Is that not the general consensus? Is 15 p/r based on a scenario that assumes that the DJIA will be cut in half yet again?
Thanks.
LMRiM Says:
> In the hedge fund world, the best managers in the
> worst markets increase their fees…
> This is clearly a bad market for real estate sellers, so
> I would expect that some star realtors will have raised
> their commissions. Is that true?
I am not as “plugged in” as I once was, but back in 1994 I got a 10% brokerage fee for selling three crappy and scary (I carried a loaded gun when I visited the properties) REO apartments and I got between 6% and 10% on many other crappy, but not as scary (I would only take a loaded gun if I had to go there at night)…
anon wrote:
> Dave, or anyone else, Is there any
> historical precedent for P/R ratios
> to be as low as 15? From what I understand,
> the historical avg for SF is somewhere
> between 24 and 27 (15 and 30 year avg,
> respectively).
Where did you get your 15 and 30 year averages (from a Realtor trying to sell you a condo)?
$800k max. I’d pay $4500 for rent x 12 x 15.
Looks like this TIC http://www.1257franciscostreet.com is approaching your range (not sure if its location passes muster).
I saw 3423 Divis this past weekend – nice job with the waterfall by the door and piped music but it didn’t drown out the street noise just enough. The backyard is very nice but the spiral staircase and “bonus room” is not great either.
Anon, torn ACL for me too. Just had surgery 1 month ago – open house tours are not fun with all the stairs!
15 year avg. at http://money.cnn.com/magazines/fortune/price_rent_ratios/
I believe I saw the 24 p/r 30 year avg. on a socketsite post, and will continue looking for it.
But I did locate the 20 and 30 year avg in the HSBC report 21.3 and 19.7. pdf. at : http://neweconomist.blogs.com/new_economist/files/HSBC_frothfindingmission.pdf
[Editor’s Note: Bay Area Rents Surge, But Housing P/E Ratio Remains Out Of Line.]
Who would consider buying these places above 2007 peak? If you took the $1.219mm peak price paid and subtract 15% that SF real estate has fallen from peak, you are probably in the ballpark for today’s value (not accounting for further falls).
Tipster – you are using a 4.75% interest rate? Correct me if I’m wrong, but I was seeing mortgages over $1mm at the highest fico score in the mid 6%’s. That would add about $800 to your monthly calculation.
Curiously, using dave’s willing rent amount ($4500) and SS’s corrected historical P/R ratio (24) yields an acceptable selling price of $1.295 for this property, almost exactly the list price.
Is this evidence of a return to instrinsic-value pricing?
***WARNING*** The HSBC report provides a metric to compare today’s prices to historic rental (and median income) trends for a MSA. They do NOT provide a multiplier to directly determine what a specific house/condo/apt is worth as they do NOT compare similar housing stock.
See p. 98-99 Rent Estimates:
Because we utilized the HUD’s rent-data for two bedroom units, we also needed to adjust for the fact that the median house has three bedrooms, according to the Census. To account for this, we raised thelevel of all rents by 30%.
[Editor’s Note: A point worth emphasizing and which applies to the Credit Suisse report as well.]
The problem with the 15/20/30 year P/R numbers is that includes the recent RE runup. Averages can get skewed up or down drastically by anomalies. For example, the average net worth of myself and Warren Buffet is about 20Billion. Instead, we need the yearly breakdowns to determine what returning to historic norms would look like.
The Fortune articles shows only 2007 so you can do a simple calc to remove that 2 years:
(30 * 19.7 – 38.2) / 29 = 19.06
About 0.6 just for 2007 alone. Quick-and-dirty estimates using a bell curve would look something like 2008 -0.4, 2007 -0.6, 2006 -0.7, 2005 -0.6, 2004 -0.5, 2004 -0.3, 2003 -0.2, 2002 -0.1 — or about 16+ for the 24 years before 2002.
Is this evidence of a return to instrinsic-value pricing?
Looking at historical p/e ratios over the last 20 or even 30 years in SF (even assuming you can adjust the data to get some meaningful ratios for a particular property) is the same sort of error that stock analysts made in 1999 when they looked at “historical” returns and trends since the mid- to late-1970s. Ask the stock investors who put a lot if money into the idea that stocks “historically” returned 10%+ a year how they are feeling now, ten years later.
There were tremendous general forces over the period 1982-2007 pushing valuations of residential housing higher, and some factors that were specific to SF and the Bay Area. These are very unlikely to continue, and valuation estimates based on data from only this period implicitly assume that those factors will continue.
I can understand anonn and other realtors taking exception to people calling for a huge reduction in the 5%-6% commission structure. In addition to being their livelihood, it implies that the services of a plugged-in and honest broker are not valuable.
But put it in the context of the last two decades where virtually every single business has experienced an enormous commission compression and model change. Whether it’s airline tickets, investment banking, stock brokers, or widgets– it doesn’t matter. There is efficiency making, increased competition, and a vastly reduced fee structure? in every business except those that have been “protected” in some way.
People (the NAR) will say that homes are different– they are each unique and can’t be commoditized and thus the fee structure doesn’t deserve to be compressed. But the same things that have had an impact on every other business– greater competition and greater information and price discovery through the internet, also apply here. Had dinner last week with a very innocent couple who were talking about trying to buy a place in marin; the woman said she always found listings, more information, more comps, etc by herself on the web. Of course the NAR has tried to fight this tooth and nail, but the efficiency in easier information dissemination reduces the value of the broker. Not to zero. But just not a constant 5% to 6%. One can make a much greater argument for the selling broker’s commission to not be reduced by as much as the buyer’s broker.
Yes, if it were my profession I would take offense because I would consider myself to hopefully be one of the ethical, highly informed brokers adding value. I have a good friend who I consider to be in this position– she is no macroeconomic whiz but has a lot of local knowledge. This has value. But if I had a dollar every time I have been lied to by a whole variety of other brokers. . . . and that is why people vent their frustrations here and elsewhere. The structure of the industry and the NAR implicitly and explicitly protect this– I am not a fan of regulation, but the way most brokers operate, as well as the commission structure, ultimately has to change.
There were tremendous general forces over the period 1982-2007 pushing valuations of residential housing higher,
Most people will tell you that the late ’80s – mid’90s saw a contraction in SF r.e. values, particularly if you build in inflation.
I didn’t take exception or offense to any call for a huge commission reduction. I merely pointed out that professional real estate investors by and large do not object to paying said commissions. Make of that what you will.
I am a newbie to all of this, so I have a few follow up questions:
What are the “general forces”? Are they specific to price valuations as opposed to rent rates? Cause if not, then the ratio would remain static over the long haul, no?
Can some one lay out the assumptions that are involved for a 15 or 10.4 P/R becoming reality in the City proper. I understand that is where you think there is value, or acceptable risk, but why do you think it will actually get that low absent historical precedent.
i once saw a Realtor help an old lady across the street…. i know, i know, hard to believe. but then a former wall street banker stole her purse, fell down and broke his wrist. a lawyer came and sued the old lady and the store in front of the sidewalk.
only honest guy was the Realtor. true story.
but of course the Realtor would have done all of the above but he wasn’t as “smart” as the banker and the lawyer… and couldn’t catch either due to his torn acl
I used a 5% rate. Note that I also omitted the opportunity cost of the 20% down because interest rates are essentially zero.
Yes, interest for $1M properties is probably higher than 5%, but my point is that the only thing supporting real estate prices at this point is A)interest rates are subsidized, B)interest rates are low, and C)rents have not fallen to equilibrium levels yet.
That’s a three legged stool and one leg (A) is about to get chopped off at the level of a two bedroom condo in a good area.
MossySF,
because the chart gives both 2007 and the 14 years before that, it would be (15 * 27.4 – 38.2)/14 = 26.62, but I get your point.
The HSBC chart allows us to exclude the bubble on page 51. Eliminating the last few years, and giving it an eyeball, looks to be around 20.
As some said above, averages here are not what we should be using. As with the stock market that sometimes sports high PE ratios, and othertimes sports ‘trough’ PE ratios, housing must have similar hi/lo zones.
In the case of housing at minimum it’s the opportunity cost of sticking it in somewhere safe like a CD. In the 70s/80s Im sure the PE for housing was low because of the high interest rates. What’s the point in being a landlord if you cant beat the 15% rate that you could’ve gotten from the long bond at times? If your PE isn’t lower than 6 then why invest in RE?
When expectation of higher interest rates set in here, as it seems they must in the next few year, it would seem like PE ratios will then adjust downward to reflect these expectations. Between these adjustments in investor PE and the downward adjustment that follows higher mortgage rates and lower tax deductibility, as tipster referred to, there are some major forces up against RE investors in the next decade.
I heard 228 mallorca which is near by just went into contract near asking with several offers. That was 1,700 sf @ 1.195 for 3br/2ba and much nicer than these. I think these are overpriced.
[Editor’s Note: Apples To Apples (To Un-Upgraded Apples) On Mallorca In The Marina.]
Don’t forget 2519 Chestnut around the corner.
http://2519chestnut.com/
It’s nice, those there are some let downs – holes in the wall, light fixtures all messed up etc. etc.
nanon wrote:
> I can understand anonn and other realtors taking exception
> to people calling for a huge reduction in the 5%-6% commission
> structure. In addition to being their livelihood, it implies that
> the services of a plugged-in and honest broker are not valuable.
One of the reasons I left the brokerage profession is because “honest” brokers cannot make nearly as much money as a “dishonest” broker (who will having no problem telling a buyer about a “safe” neighborhood with his hand on a loaded Derringer in his pocket while giving the evil eye to some gang members).
The guys I use to buy and sell apartments would sell a building full of gang members that is about to fall down due to dry rot and termites to their own Moms to get a commission. The main reasons I use them are: 1. They get top dollar for any property and 2. They have E&O insurance and will stand between me and someone with buyer’s remorse…
Assuming you want your house to preserve it’s value, applying anything north of a 15x multiple is relying on the ‘greater fools theory’ of asset pricing.
i buy real estate when it would make sense to be a landlord: 15x is a rich multiple that i would be comfortable with given SF will likely not have rent deflation. However anything above 15x assumes a level of rent increases that just won’t happen.
the moment you start valuing real estate on anything other that P/E you fall into the greater fools camp – ie “i’ll buy this because even though it’s overpriced at some point some other sucker with take it off my hands because he’s a greater fool than me” Sorry but its finance 101.
Real estate still has a long way to come down.
One of the reasons I left the brokerage profession is because “honest” brokers cannot make nearly as much money as a “dishonest” broker (who will having no problem telling a buyer about a “safe” neighborhood with his hand on a loaded Derringer in his pocket while giving the evil eye to some gang members).
The guys I use to buy and sell apartments would sell a building full of gang members that is about to fall down due to dry rot and termites to their own Moms to get a commission. The main reasons I use them are: 1. They get top dollar for any property and 2. They have E&O insurance and will stand between me and someone with buyer’s remorse
Enough with the unbelievable gun talk, OK? A “Derringer?” riiiiiight.
if there was ever an opportunity not to use a broker, this is it. two people right next door paying 2 different brokers a combined $130K?? stupid.
i realize they’re competing for a buyer but……one of the two sellers should’ve hung his own shingle ouside, cut his price a bit and fed off the foot traffic from the guy next door paying 5-6% commission. or he could do the same and offer 2% to a buying agent. or they could’ve gotten together and listed with the same agent and negotiated the rate down substantially.
these properties will sell at a price based on recent comps not on a multiple of rent. my guess is between 1.15M and 1.2M for each. the one with the spiral staircase will sell last.
by the way have you noticed that our favorite TIC on Fillmore, just around the corner has been dropped to $499K? getting close the fake auction price of $410K.
The 750k 2002 price sounds about right.
This way a couple making a combined $200-250k can buy it using traditional mortgage math (i.e., the home is priced at 3x income and requires a down payment of $150k – still hefty but doable with a single digit number of years of savings at that income level).
$1.3M? For a two bedroom condo? How many people can there be who (i) can actually pay for this, and (ii) so badly want to live there that they’ll pay $1000 a square foot to do it in a crashing market? Not many methinks – and they started trying to sell only a year after buying it and are still trying nearly a year later. Nice. I bet they’re going to bed at night wishing they still had that down payment.
What are the “general forces”? Are they specific to price valuations as opposed to rent rates? Cause if not, then the ratio would remain static over the long haul, no?
there are a few. one is demographics, specifically the baby boomers. The first wave of baby boomers hit age 36 in 1982, prime earning years. They hit their peak earning years in the 1990s. thus tremendous amounts of income hit the RE market all at once. (boomers buying first and second homes, etc).
this force may be a problem going forward as boomers downsize. they will become net sellers… this is a problem as the later generations may not have the wealth needed to buy the boomer’s RE assets.
(FWIW: this is one of the reasons that stocks started going up as well)
another issue:
the early 1980’s saw significant drop in interest rates. from as high as 18-19% all the way down to 5%. that boosted purchasing power. We are now at around 5-6%… can’t really fall much from here.
also:
lending guidelines dropped severely especially these last 10 years, to ridiculously low levels. it would be hard/impossible to continue at such low leves, and even harder to loosen them from 2005 levels!
lastly:
2 major bubbles, nearly back to back. we had 2 bubbles back to back (stock bubble then credit bubble). bubbles get harder and harder to blow for reasons outside the scope of this post.
going forward, it would be hard to maintain the RE levels or even increase them much given
-demographics
-aftermath of 2 bubbles
-already low rates supplemented by govt, that likely need to rise going forward
-the need for tightened (or restricted) access to credit at some point going forward.
now the govt is trying to blow another bubble, and trying to continue artificially low interest rates and overly loose lending… but it gets harder and harder to support these over long stretches of time.
already we face a Treasury market catastrophe given our debt. the govt will choose a cratering housing market over a currency crisis (I hope). when the debt markets start to squawk this is all over. I have no idea when that will occur, but I believe the pressure is mounting unless something radically different is done.
Sorry, I forgot to post something about “general forces”, but ex SF-er covered most of the key ones. Just a list to add a few avenues of thought to what ex SF-er wrote (I don’t have time today to expand):
1. Unmooring of the dollar in the early 1970s from any quasi gold standard, which allowed monetary inflation possibilities by the banksters on a scale never before available in the US.
2. Secular trend of credit inflation from 1982 through 2007, which led to lower nominal and real interest rates as inflation expectations became more anchored following the inflation shocks of the 70s/early 1980s.
3. Coordinate trend rise of the “FIRE” (finance, real estate, insurance) economy, which disproportionately benefitted certain urban centers through finance employment centers and (in Bay Area) tech, which relied heavily on finance availability.
4. Trend increase in securitization of mortgages, begun in the late 1970s and really kick started by Greenscam in the aftermath of the 1991 recession. Housing assets have progressively become leveraged trading assets, and unfortunately ordinary people are being forced to become unwitting gamblers in a macro game controlled by the Fed-banksters/USG partnership.
5. Prop 13 in CA since 1979, which both restricted supply over time (by lowering the apparent costs of holding underutilized real estate assets) as well as created an “insurance value” against future government tax predations, the value of which became capitalized over time in the prices of the assets and (more importantly) contributed to what people believed “trend appreciation” to be (which then recursively increased the apparent insurance value). Later, in 1986 (I think) prop 58 allowed grandfathering of the prop 13 benefits, so kids (and certain other classes of relatives) could inherit houses and still pay low taxes, which increased the dynamic of the tax distortion scheme.
6. Special tax changes in 1986 (retention of mortgage debt deduction while simultaneously removing most other forms of deductions for debt) and 1996 (changing the capital gains treatment to $250K/$500K exclusion from taxable gains for primary residences), which collectively constituted a positive shock to the desirability of housing (but which now has been fully built in to the pricing structure).
7. A secular, trend process of price disinflation since the early 1980s, in which interest rates and price inflation fell (on a trend basis, there were of course some wiggles), which increased risk appetite for leveraged assets (the leverage becomes both easier to carry with lower rates as well as necessary to obtain high nominal returns as risk free rates trended lower).
There were a number of other factors, but I think those are the major ones off the top of my head. Now, in hindsight, it’s easy to see how these factors converged. To the extent that these factors disappear or reverse (most people seem to think we are going into a period of rising interest rates and prince inflation, not disinflation, for instance), price trends will adjust. I also think that increased governmental regulation and tax burdens will lead to a less efficient economy, with less wealth and income, but that is a little more controversial in SF due to the many governmental religionists here.
“And I don’t understand how the few good ones can tolerate working under the NAR and MLS. What’s it feel like to have Lereah and Yun speaking for you? It would drive me batty.”
It’s possible to be a fully licensed broker (or agent) without a NAR affiliation and still get access to the MLS and conduct transactions. There are some hoops to jump through and additional fees, but its well worth it to be able to differentiate yourself from the Yuns of the world.
Also agree whole heartedly with the comment that macroecon + local knowledge + integrity can enable a broker to offer pretty top notch service. Doesn’t guarantee it, but in this market if you don’t understand what’s going on in the broader financial markets, not just your street, it’s hard to offer good advice.
That being said — it is a rare combination and the prevailing view on Realtors/brokers is very well-deserved.
As for 3423 Divis ….
3553 Divis sold 4/28/09 for $1.25M — or $568/sqft. Havne’t seen the properties, but it definitely seems like the sellers are dreaming as the 2 are pretty similar … except that 3553 is bigger and has more bedrooms.
Go figure and good luck.
“I saw 3423 Divis this past weekend – nice job with the waterfall by the door and piped music but it didn’t drown out the street noise just enough.”
This is hilarious. Now we have aural staging to mask noise just as traditional staging throws rugs over ugly flaws on the floor and places furniture in front of exposed electrical boxes.
What’s next ? Applying the “fresh baked cookie smell” technique to cover up the stink that wafts up from Mission Creek ?
The MLS listing for 3423 Divisadero has been withdrawn without a sale.
That’s more pent-up supply for this market. Way overpriced anyway.
Following in the footsteps of 3423 Divisadero, the MLS listing for 3415 Divisadero #1 has been withdrawn from the market without a sale.
I don’t follow the strategy there. It’s supposed to be the best time to sell.
The listing will probably come back right on time for the Fall rebound? No pun intended.
Just my opinion: I think they should right away start negotiating a short sale. The sooner it sells, the better the price.